Everything about Collateral Assignment of Life Insurance

The collateral assignment of life insurance refers to a situation in which you use your life insurance policy as collateral for a loan. That is, the money lender becomes the receiver of the life insurance benefits. If you die without paying the money you owe, the lender receives the debt benefits.

Here is a list of everything you need to know about collateral assignment of life insurance:

  • You must own a life insurance policy to use a collateral assignment of life insurance.
  • Using your life insurance policy as collateral is not very popular. If you know that you will need this service in the future, ask if your insurance provider allows collateral assignment before buying life insurance. It is important that you do your research before buying life insurance because not all money lenders accept term life insurance as collateral.
  • A collateral assignment of life insurance ensures payment of your debt even if you die. If the death benefit is larger than the money you owe, your family will receive the extra funds.
  • Your cash value can be withdrawn by the lender when using this policy. If you do not pay your loan when due, the lender can make withdrawals from your cash value.
  • You must keep your life insurance policy until you have paid your debt. If you cancel your life insurance policy before paying your debts, you will be in breach of contract.  Breaching your contact may then lead to penalty fees.
  • After paying back the loan, you are now in charge of your life insurance policy. After this, the lender is no longer the receiver of your death benefits. You can make use of your cash value, and your documents are returned to you.